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This guide discusses the new rule that allows a small business prime contractor to receive credit under the Limitations in Subcontracting Rule for subcontracting work to Similarly Situated Entities.

What Does the Rule State?

Under 13 CFR 125.1, a similarly situated entity is a subcontractor that has the same small business program status as the prime contractor. This means that. . . for an 8(a) requirement, a subcontractor that is an 8(a) certified Program Participant.

What this means is that any work done by a similarly situated entity (for instance an 8(a) contractor is similarly situated to another 8(a) contractor) is not considered to be "subcontracted" for the limits on subcontracting, but may be counted towards the mandatory performance level for the small business concern acting as the prime contractor.

What Happens if I Fudge (Cheat) a Little?

This is a big violation.

the work performed must be performed by the employees of the prime contractor or employees of the first tier similarly situated entity to count towards the mandatory performance requirements. If a first tier similarly situated entity subcontracts out work, that work will count as subcontracts performed by a non-similarly situated entity.

How Will the SBA and Contracting Officer Track This?

The SBA is not requiring a written agreement with a predetermined similarly situated entity. That plan was not in place for SDVO or HUBZone programs. The SBA was concerned about the administrative burden placed on small business concerns and the programs having different burdens placed upon them.

The SBA is not requiring mandatory performance limits be reported to the contracting officer as this was not necessarily authorized by the statute and the SBA did not and does not require it for SDVO or HUBZone Programs.

What Will Happen to Those Companies that Break the Rules?

Fines and Penalties. The SBA notes that the $500,000 dollar fine is the minimum amount (or the amount spent in excess of the permitted levels if greater) mirrors Section 1652 of the NDAA. The SBA believes this will deter contractors from agreeing to comply with limitations on subcontracting without a practical plan for compliance with applicable subcontracting limitations as well as passing on work to firms that the prime has adequately ensured is similarly situated.

Are There any Other Advantages to teh Rule?

Yes, Exemption from Affiliation for Ostensible Subcontracting Rule. This exemption applies to the relationship between the prime and a similarly situated entity. In short, the prime and similarly situated first tier sub will not be found affiliated based on the ostensible subcontractor rule (think primary/vital and/or unduly reliant roles).

Are There any other "Down" Sides?

The prime contractor will count the revenue (such as the revenue attributed to an 8(a) contract) when a similarly situated entity is used as a subcontractor and the prime contractor will not deduct the revenue amount subcontracted to that entity.

Conclusion

This rule allows small businesses who could not otherwise meet their minimum performance requirements to find "similarly Situated Entities" to assist them to meet their Limitations. Overall, this lawyer believes this to be an outstanding change to the Rules that will assistance small businesses greatly.

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About the Author

David A. Rose, Esq., is a senior member of the firm practicing throughout the United States and internationally based in Duluth (Atlanta) Georgia. In addition to Federal Contracts and Procurement law, he assists companies and corporations with business formation issues (LLCs, Domestic Corporations, Joint Ventures, Teaming Arrangements, 8(a) and Small Disadvantaged Applications to SBA, MentorProtégé, Affiliation and Ostensible Subcontractor Issues, etc.) and with the establishment of subsidiary entities in foreign locations from the Caribbean to the Mid and Far East. With more than 20 years of experience, the former Deputy General Counsel (Deputy Staff Judge Advocate) of the Air Force Center for Engineering and Environmental Excellence, oversaw the legal program for execution of over $4 Billion in Federal contracts each year. Dave has served at senior positions in Korea, Japan, Germany, Great Britain and the Pentagon and now brings that breadth of knowledge and experience to the commercial sector. His background is complemented by degrees in chemistry, mathematics, a jurisdoctorate, and post doctoral degrees in environmental law and procurement law from George Washington University. He was most recently selected as the 2011 SAME National Industry Small Business Advocate. He is active in the State Bar of Georgia, US Court of Federal Claims, US Tax Court, Armed Services Board of Contract Appeals, Fulton County Bar Association, the Society of American Military Engineers, the American Society of Civil Engineers, and the Judge Advocates Association. He currently holds the active rank of Lt Col in the United States Air Force Reserves and the position of Deputy Staff Judge Advocate (Cat A) to the Headquarters, United States Air Force Reserves where he is one of the primary legal advisers to the Commanding Officer of the Air Force Reserves, Lt General Jackson.

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